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Effects of the Money Policies Applied by the Fed - Assignment Example

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The author of this paper will focus to investigate the effects of the monetary policies applied by the Fed. The paper also discusses monetary policy aims at ensuring that the economy has attained full employment as well as regulate the level of inflation…
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Effects of the Money Policies Applied by the Fed
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Download file to see previous pages Fed refers to the United States bank that acts as a lender of last resort to commercial banks. Fed is some times referred to as a bank of other banks. The bank manages and regulates commercial banks and other financial institutions. Fed may promote economic growth via manipulation of interest rates. Whereby, the Fed may decide to either decrease or increase lending rates to stimulate the U.S economic growth. The rates may be adjusted to increase the level of inputs and employment as well as to reduce the level of inflation. Connectively, Fed may participate in an open market operation to issue or to buy Treasury securities with an aim of promoting economic stability (Obringer pp.1-3).  Monetary policy refers to the actions taken by the Federal Reserve to influence the amount of money in the United States economy. The Federal monetary policies involve three basic tools namely; open market operation, reserve requirements and discount rates (Brezina pp. 19-20). Fed regulates the amount of money in circulation by participating in open market operation, whereby, Fed buys and sell securities.  
Whereby, high reserves requirements may reduce the amount of credit rendered by commercial banks. This may consequently lead to a decrease in the circulation of money (Brezina, pp.5-20). In the above connection, the Fed may utilize discount rates to stimulate economic growth as well as promote economic stability. Fed decides either to increase or decrease the rates of interest charged to the commercial banks. For example, if the Fed increases interest rates to commercial banks, borrowers become discouraged and hence there will be less money in circulation (Brezina pp.10-25). Fed utilizes monetary policies to stabilize commodity prices; to ensure there is the maximum level of employment as well as ensuring that the level of inflation has been fully minimized. For instance, the Fed may decide to reduce or increase the cost of credit by making adjustments on discount rates (Tucker pp.436). Additionally, the Fed may utilize reserve requirements and open market operations to stimulate U.S economic growth. Both Classical and monetarist economist asserted that monetary policies may be utilized to make adjustments on aggregate demand as well as to influence the commodities general price levels. On the contrary, monetary economist asserted that monetary policies may be utilized to make interest rates adjustment. This may consequently cause a change in real GDP and investments (Tucker pp.436-437). ...Download file to see next pagesRead More
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